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Problem 13-24 Simple Rate of Return; Payback Period; Internal Rate of Return [LO13-1, LO13-3, LO13-6] The Elberta Fruit Farm of Ontario always has hired transient

Problem 13-24 Simple Rate of Return; Payback Period; Internal Rate of Return [LO13-1, LO13-3, LO13-6]

The Elberta Fruit Farm of Ontario always has hired transient workers to pick its annual cherry crop. Janessa Wright, the farm manager, just received information on a cherry picking machine that is being purchased by many fruit farms. The machine is a motorized device that shakes the cherry tree, causing the cherries to fall onto plastic tarps that funnel the cherries into bins. Ms. Wright has gathered the following information to decide whether a cherry picker would be a profitable investment for the Elberta Fruit Farm:

  1. Currently, the farm is paying an average of $200,000 per year to transient workers to pick the cherries.
  2. The cherry picker would cost $250,000. It would be depreciated using the straight-line method and it would have no salvage value at the end of its 8-year useful life.
  3. Annual out-of-pocket costs associated with the cherry picker would be: cost of an operator and an assistant, $98,000; insurance, $5,000; fuel, $15,000; and a maintenance contract, $20,000.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor using tables.

Required:

1. Determine the annual savings in cash operating costs that would be realized if the cherry picker were purchased.

2a. Compute the simple rate of return expected from the cherry picker.

2b. Would the cherry picker be purchased if Elberta Fruit Farms required rate of return is 18%?

3a. Compute the payback period on the cherry picker.

3b. The Elberta Fruit Farm will not purchase equipment unless it has a payback period of five years or less. Would the cherry picker be purchased?

4a. Compute the internal rate of return promised by the cherry picker.

4b. Based on this computation, does it appear that the simple rate of return is an accurate guide in investment decisions?

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5723 5432 5.167 4925 4.703 4499 4.311 4.137 3976 24 15.247 13799 12.550 11.469 10529 9.707 8.985 8 348 7.784 7 283 6835 6434 6073 5746 5.451 5.182 4937 4.713 4507 4.318 4.143 3981 25 15.622 14094 12.783 11654 10 675 9.823 9.077 8.422 7 843 7330 6873 6464 6097 5766 5.467 5.195 4.948 4.721 4514 4323 4.147 3 985 26 15.983 14.375 13.003 11.826 10810 9.929 9161 8.488 7896 7 372 6906 6.491 6118 5783 5.480 5206 4956 4728 4.520 4328 4.151 3988 27 16.330 14 643 13.211 11987 10935 10.027 9.237 8.548 7943 7409 6935 6514 6.136 5.798 5.492 5215 4964 4.734 4524 4.332 4.154 3990 28 16663 14.898 13.406 12.137 11.051 10 116 9.307 8.602 7984 7441 6961 6.534 6.152 5.810 5502 5223 4 970 4739 4 528 4.335 4 157 3992 29 16984 15.141 13.591 12 278 11.158 10.198 9.370 8.650 8.022 7.470 6983 6.551 6 166 5820 5 510 5229 4.975 4743 4531 4.337 4.159 3994 30 17.292 15.372 13.765 12.409 11.258 10.274 9427 8694 8055 7496 7003 6566 6 177 5.829 5517 5235 4979 4.746 4 534 4.339 4.160 3995 40 19.793 17.159 15.046 13.332 11925 10.757 9.779 8951 8 244 7634 7105 6.642 6233 5.871 5.548 5.258 4997 4760 4544 4 347 4.166 3999

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